With the current global economic situation, many people have settled with alternatives to stay afloat. One such alternative is Forex trading. This article answers the question- How does Forex trading work? And provides a full guide for beginners.
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Table of Contents
What is Forex?
To give a satisfactory answer to the question- how does forex trading work? It is proper to start from the basic definition of what Forex is. Forex is simply a contraction of the words- Foreign Exchange. The short term, FX and currency market are also used interchangeably. Forex is a global decentralized market that enables anyone to trade currency pairs, stock, synthetic indices, etc. By decentralization, it means that the market has eliminated total power from a central body or government. Decentralization delegates power to individual and eliminates the influence of certain third parties such as central governments or financial institutions like banks. With this understanding, let’s move to the next stage.
What is Forex Trading?
How does Forex trading work? To answer this question, it is important to know why Forex trading is being done. Forex trading is simply an activity that involves exchanging currencies. In this context, there are usually 2 currencies involved. These two currencies are referred to as pairs. Beyond the idea of trying to make profits from trading currency pairs, currencies are being traded on the international scene to aid foreign trades and businesses.
For example, an automobile business dealer in Africa, say Nigeria precisely, willing to purchase (import) automobiles from Germany, will have to pay the equivalent of his currency, Naira in Euro to the German automobile company.
The same applies to a tourist from Germany who goes to see a Safari in South Africa. He wouldn’t pay in Euro but rather exchange his Euro for Rand which is the currency the Safari accepts.
How Forex Trading works
Forex trading is similar to buying and selling products in a market. A particular scenario ensures ; if you go to the market and you intend to buy or sell building materials, first you will need to do a market survey of the prices in the market, after comparing prices from different vendors, you can now decide which of the vendor to buy from. As a rule of thumb in business, It is always good to buy when the price of goods are low and sell when the price of good are high so that you can make some profits.
In forex market, you have many currency pairs, stocks, indices, etc., to choose from; you can either buy or sell any of them. Just like buying in a real world market, if you want to buy or sell GBPUSD (GBP = Pound, USD = Dollar) for instance, you will need to study the market structure, understand the overall trend of the market, then decide if the market structure is suitable for you to sell or buy GBPUSD.
If the market structure is suitable for you to sell GBPUSD say the pair is at higher high for instance and the pair has met all your laid down condition for a sell, since Forex market is a high risk market, you need to decide your take profit or stop loss point in the market before placing the trade in order to manage your risk effectively. So that once the price of GBPUSD gets to your take profit point, the market will close and give you some profits, if the market goes against you, once it get to the stop loss point, it will close and give you some loses.
With this knowledge, let’s move on to the next level which is learning Forex Trading.
How to Learn Forex Trading
From the comfort of your home, you can learn almost anything as long as you have the desire, and a device (phone, laptop or tablet) connected to the internet. There are series of materials on the internet that can give you the basics understanding of forex and assist you grow and excel in the forex market. For instance, Baby pips has a free online course that can take you from a beginner to an expert in the forex Market.
It is good to have a general knowledge of the forex market on a platform like Babypips, or YouTube, then after that you can pick some topics and do in-depth research. Most people start with Price action trading; which is trading the naked chart without any indicators, then smart money concept, etc., it is not compulsory that you know everything about the forex market, the most important thing is to know enough that will make you profitable in the market.
Now that you are set to begin your Forex journey, it is advised that you find and choose a good broker.
Choosing a Good Forex Broker
First of all, what is a Forex broker? Forex brokers are those companies that provide a platform that makes it possible for you to trade Forex. That is, they provide platforms that enable the buying and selling of currencies. There are a whole lot of Forex brokers which might be confusing to choose from.
Generally, the ideal forex broker provides three basic benefits for a beginner; first, they should be regulated and reputable, offer educational materials and provide accurate market research.
Here are some brokers you can choose from:
Formerly known as Binary, Deriv is one of the beginners friendly broker that offer good leverage, 24/7 trading option, quick and easy deposit and withdrawal options, many asset, from currency pairs, cryptocurrency to Synthetic indices (e.g Boom and Crash, V75, etc). You can open a demo account with Deriv by clicking here
FBS a forex broker that provides a multi asset trading benefit for forex traders where they are given numerous options they can maximize to their advantage
IQ Option broker
IQ option is a trading platform where you can trade Forex, Crypto, Stocks, Commodities, Indices and ETFs. Currently, the platform has over 80 Million registered users.
Forex Trading Platforms
Forex trading platforms are platforms where forex traders can log in, access the forex market, analyze trade, place trades and view their trading history. The two most popular forex trading platforms are Meta trader 4 (MT4) and Meta trader 5 (MT5).
The major difference between MT4 and MT5 is that MT4 was designed only for CFDs forex instrument while MT5 is a multi-asset trading platform. Both of this platforms are
How to Make Money from the Forex market
The basic goal of every forex trader is to make money from the forex market. But from research, almost 90% of forex traders blow their forex account in their first week or even first day in the forex market. This is so because forex is very risky. To make money in the market, you have to develop a winning strategy, then test this strategy on your demo account before trading on your real account.
Once you have proven strategy you can now use that to make money from the forex market; it’s simple, sell when the market condition meet your laid down rule and buy when the market condition meet your laid down rule, make sure you manage your risk effectively.
How does forex trading work: Final thoughts
I hope we are able to answer the question- how does Forex trading work? To be a successful forex trader, you need to develop a good strategy, learn how to manage your risk effectively and follow your strategy always.
Trading Forex is risky, you can lose your capital, please apply proper risk management and trade with only what you can afford to lose.